Navigant Research Blog

Enabling Remote Microgrids in the Developing World

— April 4, 2014

In my last blog, I wrote about the success mobile network operators (MNOs) are having with electrifying rural communities in developing regions, such as Latin America and Africa, by partnering with companies that sell solar home systems.  Much credit must go to the pico systems themselves, which are a cheap and reliable way to provide for the customer’s basic energy needs (cell phone charging and lighting).  However, there are two greater forces at play that reach far beyond the business of rural electrification: MNOs have found an effective business model in pay-as-you-go (PAYG) and they have employed an effective money transfer technology, known as mobile money.

These two forces answer the question: What has enabled the exponential growth of cell phone usage in the developing world?

Phone Bank

PAYG is a prepaid mobile phone plan.  You pay for a phone with a certain amount of airtime on it and you refill the time in your account as needed.  There’s no contract or monthly rate.  If you run out of time, your service is cut off, plain and simple.  This model works well for the off-grid rural poor who live on an inconsistent daily budget and who typically don’t have bank accounts.  It should be noted that some utilities in developed parts of the world are also experimenting with PAYG meters and they are finding that it is the only model that has successfully led to a change in consumer behavior (in the form of energy conservation).  As my colleague Peter Asmus details in his recent blog, this isn’t the only example of how the developed world can learn about energy solutions from the developing world.

Returning to the unbanked poor of the developing world, MNOs spotted an opportunity to capitalize on the lack of banking infrastructure in remote communities, and they have leveraged vendor networks and mobile technology to offer basic banking services to their customers.  To purchase airtime in the developing world, customers visit their local mobile airtime vendor and pay cash upfront for a scratch card of a certain value.  They enter the code from the scratch card into their phone to redeem the value of the card as mobile money, which goes directly into the mobile money wallet in their phone.  The mobile money wallet is protected by a PIN and acts essentially like a debit account, which can be used to purchase more airtime, along with other goods and services, to send and receive money, and to pay bills.  The MNO charges the customer for transactions made, so it is a lucrative new revenue stream for them.  More significantly for nanogrids, mobile money has opened the door to provide financing to unbanked customers.

Nanogrid Frontiers

Historically, one of the greatest barriers to off-grid households purchasing solar arrays has been the high upfront cost.  Investors, whether they’re vendors, microlenders, or nongovernmental organizations (NGOs), have had a hard time offering PAYG lending schemes to consumers due to the difficulty of collecting a long stream of small payments from a remote village, as well as the inability to monitor the systems.  Mobile money can provide a platform that enables lenders to conveniently offer PAYG schemes to off-grid consumers for the purchase of nanogrids, among other things.  More importantly, mobile money could turn remote parts of the world into profitable frontiers for the nanogrid market.  Many residential solar vendors (such as Simpa Networks in India) already see them that way, and these vendors are finding investors to finance PAYG systems as well as partners to handle the mobile money transactions.

While there is some variability in what these PAYG schemes look like, the keys to success seems to be the ability to track payments and usage easily and the ability to cut off service if a customer falls behind.  To view a list of nanogrid PAYG case studies, check out Navigant Research’s report, Nanogrids, and to learn about other business models that are being used to electrify remote parts of the world, view the replay of our “Remote Microgrid Business Models” webinar.

 

Cellulosic Biofuels Not Dead

— April 4, 2014

Risk_webCellulosic biofuels have multiple advantages over conventional biofuels like ethanol and biodiesel.  Primary among the advantages is that the fuel’s feedstock is agriculture waste, which means it avoids controversial topics like the food versus fuel debate and direct or indirect land use change concerns.  Despite these advantages, hope for cellulosic biofuels has eroded because multiple companies have failed to produce the fuel at scale and a competitive price point.

The many failures forced the U.S. Environmental Protection Agency (EPA) to cut the annual volumetric blending requirement for cellulosic biofuels mandated by the Renewable Fuel Standard (RFS) to levels ranging from 6 million gallons to 9 million gallons between 2010 and 2013.  For 2014, the EPA has proposed cutting the original volume requirement for cellulosic from 1.75 billion gallons to 17 million gallons.  Additionally, KiOR, the company closest to producing cellulosic biofuels at scale, has run into financial stumbling blocks.  This situation is leading some to question whether cellulosic biofuels will ever take off.  But while the industry has certainly appeared to be on the brink, investors do still have hope, as demonstrated by Cool Planet’s successful closing of $100 million Series D financing at the end of last month.

Saving Cellulosic Biofuels One Plant at a Time

Cool Planet has often been described as similar to KiOR, as the two companies take cellulosic biomass and convert it to hydrocarbons chemically identical to petroleum-based fuels.  The two companies are, however, also “dramatically different,” as described in interview with Cool Planet’s CFO Barry Rowan.  The most significant differences are related to Cool Planet’s novel approach to production plant development, the production process, and the development of the company’s propriety biochar, CoolTerra.

Rather than focusing on one or more major production facilities, Cool Planet will develop numerous small-scale (10 million gallons per year) plants.  This approach has multiple advantages.  First, it reduces risk to investors, as each small capacity plant is significantly less costly than one giant facility.  Second, the development costs of each new plant are reduced and production margins improved since Cool Planet is able to innovate on lessons learned from past plant developments.  Third, it allows Cool Planet to bring the plant to the biomass rather than the biomass to the plant.  This reduces the transport costs for the cellulosic biomass and insulates Cool Planet against feedstock shortages.  Rowan notes that the capacity of each plant is limited to a fraction of a region’s cellulosic resources.

Cool Planet can use a variety of cellulosic feedstocks, which the company exposes to high temperature and pressure to create a biovapor.  The biovapor is then converted to a high octane gasoline blend stock.  In contrast, KiOR’s process produces a biocrude oil, which is then refined into gasoline and diesel products.  When put through a proprietary catalytic column, the biovapor created by Cool Planet’s process produces the biofuels and a residual biochar – both of which have markets.

The biochar produced from the biofuels development is then treated by Cool Planet to create the company’s proprietary product, CoolTerra.  According to the company, which has five PhDs working on this product, trial results show improved crop yields and growth rates, as well as reduced water and fertilizer input requirements.  The resulting impact is a fuel that is carbon-negative; any carbon produced is sequestered in the CoolTerra, which will be used to produce carbon-absorbing plants and thus reduce atmospheric carbon concentrations.

Development of Cool Planet’s first 10 million gallon facility located in the Port of Alexandria, Louisiana is underway; the plant should be operating by 2015.  The development of two other plants in Louisiana is scheduled to follow in 2015 and 2016.  Rowan estimates Cool Planet can be profitable at oil prices of $50 per barrel, well below today’s rate.  Real world tests of Cool Planet’s business model will demonstrate its viability.  If anything can be gleaned from the recent struggles and successes of KiOR and Cool Planet, it’s that the industry is not dead; rather, it is simply taking longer to adapt to technological and logistical problems than expected.  And it’s clear investors believe Cool Planet may have a winning approach.

 

Policy Headwinds for the Wind Industry

— April 4, 2014

Weatherman_webFor the first time in 8 years, the global wind industry installed less wind capacity in an annual cycle than the year before.  A total of 36.1 GW was brought online in 2013, representing a full 20% drop from the 44.9 GW installed the year before, according to the latest figures from Navigant Research’s World Market Update – International Wind Energy Development Forecast 2014-2018.  Policy fluctuations and uncertainty are key factors for the drop and continue to frustrate those in the wind industry.  The countries where policy put the brakes on wind power development globally in 2013 or is dampening its future outlook include:

United States: The biggest dent to global wind growth came from one of the sector’s largest markets, the United States, where new installations fell 92% from a record 13.1 GW in 2012 to just under 1.1 GW in 2013.  This was the result of a dysfunctional federal government, which delayed renewing the wind industry’s key tax incentives.  Strong growth is expected this year and the next, but the broader boom and bust policy cycle is likely to continue in coming years.

Spain: For the beleaguered Spanish wind market, 2013 was the first full year in which installation data clearly reflected the downturn caused by the near total removal of incentives for wind energy.  With just 175 MW of new capacity added in 2013, Spain’s wind industry recorded its lowest growth rate in 16 years. The sector’s collapse is the result of the national government’s decision to withdraw virtually all subsidies for renewable energy projects. The latest electricity market reforms scrap production incentive payments for all new wind plants and attempt to reduce revenue for wind plants already operating.

Italy: Newly installed wind capacity in Italy was down 65% from 1,272 MW in 2012 to just 450 MW in 2013. The decline in new installations was widely expected, with Italy switching policy from a system of tradable green certificates to a structure based on competitive bidding for a capped volume of fixed-price 20-year contracts. The contract prices are significantly lower than prices for wind under the certificate program. The change in market structure set off a rush among developers to connect wind projects to the grid before January 1, 2013 and the drop-off for the full year 2013.

Canada: Wind plant construction hit a record 1,599 MW in Canada last year, but medium- and longer-term forecasts are lower due to policy changes at the provincial level.  Ontario scrapped its feed-in tariff (FIT) program of premium fixed power purchase prices for wind power after the World Trade Organization found the local content rules to be in violation of international law.

Australia: 2013 was a strong year for wind plant construction in Australia, with 655 MW connected, but the future of Australia’s wind power industry is in serious doubt following the late 2013 election that resulted in a conservative coalition government that is openly hostile to wind power.  The new government is planning a number of policy reversals in 2014 that will dilute or collapse price support for wind power generation and strengthen the fossil fuel industry.

European Union: The EU is making progress toward meeting its 2020 climate and energy target, but the view beyond has grown less positive for renewables.  The European Commission proposed a new framework for a climate and energy policy for the 2020-2030 timeframe that includes a proposed renewable energy target of 27% by 2030, lower than the previously discussed 30%.  In addition, under the proposal, the target would not be formally translated into national, binding, country-level commitments, as it is currently structured through 2020 for all EU member states.

For further details on policy headwinds, how they contributed to changing market shares of the top wind turbine OEMs globally and within country specific markets, and a range of other current topics, check out the recently released World Market Update – International Wind Energy Development Forecast 2014-2018.

 

Electricity Pricing and the Economics of EVs

— April 2, 2014

The hottest global market for plug-in electric vehicles (PEVs) is Norway, where PEVs accounted for nearly 5.5% of all light duty vehicle sales in 2013.  Success of PEV sales in Norway has been credited to the country’s attractive purchase incentives and tax breaks, which include exemption from all non-recurring vehicle fees, annual road taxes, all public parking fees, and toll payments, along with free access to bus lanes.  While these incentives are appealing, equal credit goes to the massive price gap between the costs of petroleum fuels and electricity in the country.

One of the most attractive aspects of PEVs is that driving on electricity is significantly cheaper than driving on gasoline or diesel.  While this is largely true in most markets, the price difference can vary significantly by market.  The most meaningful variables in fuel cost returns are the retail price of petroleum-based fuels, the residential rates for electricity (since a vast majority of PEV charging is done at the owner’s home), and the average efficiency of new conventional vehicles compared to PEVs.

The Turkish Premium

The price of retail gasoline and diesel varies sharply from country to country.  The starkest example is in Turkey and Iran: in 2012, a gallon of gasoline cost $9.61 in Turkey (highest in the world) and $1.25 in neighboring Iran.  Electricity prices are also vastly different from country to country; residential electricity rates per kilowatt-hour (kWh) in France, which gets 80% of its electricity from nuclear power, are half the rates as those in Germany.  The variation in prices for each fuel determines which markets offer the best returns for PEV owners.

The best returns on fuel costs in Europe are in Norway and the worst are in Germany.  If the average new light duty vehicle in Europe has an mpg rating of 35 and the average new PEV has a miles per kWh rating of 2.7, then on a per-mile basis, Norwegian PEV owners save $0.16 per mile while German PEV owners save only $0.05.  Given that Germany’s incentives for PEVs are far less attractive than Norway’s, it’s not surprising that the Scandinavian country (population just over 5 million) still put around 1,500 more PEVs on the road last year than did Germany (population just over 80 million).

State to State

Among U.S. states (average new vehicle mpg is now 25) the best returns are in Indiana ($0.11 per mile) and the worst are in Hawaii ($0.03 per mile).  Given current government incentives, maintenance cost reductions, an annual vehicle mileage of 12,000, and an average $12,000 premium for PEVs, a battery electric vehicle (BEV) driven in Indiana nets a return in less than 4 years – twice as fast as one driven in Hawaii.

Fuel Costs per Mile of Fuel, Select Regions: 2014

Pricing-Economics of EVs blog (04-02-14)

(Source: Navigant Research)

Because PEV returns are so varied, local utilities can significantly affect markets by introducing time-of-use (TOU) electricity rates specific to PEV owners.  TOU rates, which incentivize off-peak electricity usage, can drastically reduce per kWh prices for PEV charging.  Residential TOU rates are limited, for now, to a few utilities in the United States.  Their adoption, however, is a win-win for utilities.  TOU rates can increase utility revenue by making market conditions for PEVs better, thus increasing demand for electricity, and TOU rates shift the increased demand to manageable off-peak hours.  The final outcome is one in which utilities make more money and drivers save more money.

 

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